One of the World’s Most Unstable Currencies

January 12, 2017

Global investors are fleeing the Mexican peso en masse again.

The worst performing currency of 2017 (down 20% against US dollar) is now down another 5% in the first 11 days of the New Year.  And there are no signs of relief, in part because Donald Trump just told automakers that higher taxes would be levied on vehicles made in Mexico.

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Coupled with fears of Trump tariffs and border control measures to the border, as well as a jeopardized North American Free Trade Agreement (NAFTA) sent the peso to a historic low of 22 against the U.S. dollar.

Remember, NAFTA created a free-trade zone between Mexico, the U.S. and Canada, opening a sizable consumer market to Mexican businesses.  The deal also brought stability to the peso after a series of crises.  That is now in jeopardy if Trump does follow through on renegotiating the agreement.

And if you’re thinking of investing for a dead cat bounce in the peso, you might want to reconsider that impulse.

As long as the uncertainty persists, the peso could slip even lower near-term, as central bank officials run out of bullets.  Previous attempts to ramp up the peso by selling $2 billion in dollar reserves may have helped prevent a deeper crash, but the country is still having a tough time keeping pace with the U.S. dollar.

The downward pressure on the currency is expected to continue with potential protectionist policies of the incoming Administration.  Some analysts believe the peso could be devalued by another 10% to 13%, near-term if this continues.

At the same time, the annual rate of inflation in Mexico just ticked to a two-year high in December, which could warrant a rate hike from the central bank.  Should that happen, the peso could recover slightly against the dollar.  However, even in that event, a rally could be short-lived under the new Trump presidency.

The peso’s next hurdle is 22.42.  After that, there’s no resistance.  Again, this is a currency with too many hurdles to clear right now.

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